UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 0-12374
EQUITEX, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0905189
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7315 East Peakview Avenue
Englewood, Colorado 80111
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(303) 796-8940
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at April 30, 1999: 7,014,443
<PAGE>
EQUITEX, INC.
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The accompanying interim unaudited consolidated condensed financial
statements have been prepared in accordance with the instructions to Form 10-QSB
and do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included, and the
disclosures are adequate to make the information presented not misleading.
Operating results for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. These statements should be read in conjunction with the financial
statements and notes thereto included in the Annual 10-KSB/A Report (filed with
the Securities and Exchange Commission) for the year ended December 31, 1998.
F-1
<PAGE>
EQUITEX, INC.
Consolidated Balance Sheet
(Unaudited)
MARCH 31,
1999
ASSETS
Current assets
Cash and cash equivalents ............................... $ 1,520,419
Account receivable - related entity ..................... 40,000
Accounts receivable - other ............................. 33,500
Advances to FirstNet Capital ............................ 567,629
Loans receivable - National Business Finance, LLC ....... 175,000
Inventories ............................................. 142,672
Prepaid expenses and other current assets ............... 50,298
Notes receivable - other, net of allowance
for uncollectible accounts of $100 ................. 56,375
Investments:
Trading securities ................................. 1,370,887
Available-for-sale securities ...................... 44,815
-----------
4,001,595
Fixed assets:
Furniture and equipment ................................. 224,213
Leasehold improvements .................................. 68,494
-----------
292,707
Less: accumulated depreciation .......................... (145,256)
-----------
147,451
Other assets:
Investment in First TeleBanc ............................ 800,000
Other investments, at cost .............................. 135,000
Deferred acquisition costs .............................. 127,000
Goodwill, net of accumulated amortization
of $14,237 ......................................... 627,584
Trade name, franchise rights and other
intangibles, net of accumulated
amortization of $10,768 ............................ 184,232
Contract deposit receivable, net of
allowance for uncollectibility of $150,000 ......... 150,000
Deposits and other ...................................... 47,770
-----------
2,071,586
$ 6,220,632
===========
(Continued)
F-2
<PAGE>
EQUITEX, INC.
Consolidated Balance Sheet
(Unaudited)
MARCH 31,
1999
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable - related parties ......................... $ 240,498
Notes payable - other ................................... 37,845
Accounts payable and other accrued liabilities .......... 168,485
Accounts payable to brokers ............................. 282,161
Accrued bonus to officer ................................ 798,105
-----------
1,527,094
Minority interest ............................................. 238,213
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01; 2,000,000
shares authorized; 2,100 shares
issued and outstanding ............................. 21
Common stock, par value $.02; 7,500,000
shares authorized; 5,861,265 shares
issued; 5,827,915 shares outstanding
in 1999 ............................................ 117,225
Additional paid-in capital .............................. 10,676,681
Accumulated comprehensive other income .................. 35,851
Accumulated deficit ..................................... (6,260,416)
Less: treasury stock at cost ............................ (114,037)
-----------
4,455,325
$ 6,220,632
===========
The accompanying notes are a part of this consolidated statement.
F-3
<PAGE>
EQUITEX, INC.
Consolidated Statement of Operations
(Unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
1999 1998
(PRO FORMA)*
REVENUES
Sales ........................................ $ 222,348 $ --
Consulting fees .............................. 30,000 --
Interest income .............................. 12,050 365
Administrative fees .......................... 2,647 941
Realized gain on investments ................. 315,564 492,474
----------- -----------
582,609 493,780
EXPENSES
Cost of goods sold ........................... 131,086 --
Salaries ..................................... 163,988 75,153
Officer's bonus .............................. 222,561 43,545
Consulting fees .............................. 152,500 88,000
Employee benefits ............................ 97,101 96,174
Rent ......................................... 36,470 8,689
Advertising and promotion .................... 31,322 2,334
Office expense ............................... 19,581 32,990
Legal and accounting ......................... 43,507 30,715
Interest ..................................... 20,786 20,324
Repairs and maintenance ...................... 3,984 --
Bad debt expense ............................. 13,748 13,733
Depreciation and amortization ................ 17,644 2,721
Other general and administrative ............. 99,551 86,643
Unrealized loss (gain) on trading securities . 15,911 (131,559)
----------- -----------
1,069,740 369,462
----------- -----------
Net income (loss) before minority
interest and taxes ...................... (487,131) 124,318
Minority interest in net income (loss) ....... 11,787 15,115
----------- -----------
Net income (loss) before income taxes .... (475,344) 139,433
Provision for income taxes - deferred ........ -- (51,308)
----------- -----------
Net income (loss) ........................ (475,344) 88,125
Other comprehensive income, net of tax
Unrealized holding gains (losses) on
securities arising during period ....... 35,851 52,475
----------- -----------
Comprehensive income (loss) .................. $ (439,493) $ 140,600
=========== ===========
Net income (loss) per common share - primary . $ (.07) $ .04
=========== ===========
Net income (loss) per common share -
fully diluted ............................ $ (.07) $ .04
=========== ===========
Weighted average number of common shares ..... 5,612,291 3,560,115
=========== ===========
* As if an operating company rather than a BDC.
The accompanying notes are a part of this consolidated statement.
F-4
<PAGE>
EQUITEX, INC.
Statement of Operations
(Unaudited)
FOR THE THREE
MONTHS
ENDED MARCH 31,
1998
(WHILE A BDC)
Revenues
Interest and dividends ..................................... $ 10,380
Consulting fees ............................................ 250,000
Administrative fees ........................................ 941
Miscellaneous .............................................. --
-----------
261,321
Expenses
Salaries and consulting fees ............................... 75,153
Officer's bonus ............................................ 43,545
Office rent ................................................ 8,689
Legal and accounting ....................................... 27,633
Employee benefits .......................................... 96,174
Other general and administrative ........................... 96,779
Interest ................................................... 20,324
Bad debt expense ........................................... 13,733
Depreciation and amortization .............................. 2,721
-----------
384,751
Net investment loss ........................................... (123,430)
Net realized gain on investments and
net unrealized gain on investments:
Proceeds from sales of investments ......................... 712,143
Less: cost of investments .................................. 219,669
-----------
Net realized gain on
investments before income taxes ............................ 492,474
Net investment loss and net realized gain
on investments before income taxes ......................... 369,044
Income tax benefit (provision) - current
Income tax benefit (provision) - deferred ..................... (89,451)
-----------
Net investment loss and net realized
gain on investments ........................................ 279,593
(Continued)
The accompanying notes are a part of this statement.
F-5
<PAGE>
EQUITEX, INC.
Statement of Operations (Page 2)
(Unaudited)
FOR THE THREE
MONTHS
ENDED MARCH 31,
1998
(WHILE A BDC)
Increase in unrealized
appreciation on investments ................................ $ 261,283
Less income tax benefit (provision)
applicable to (increase) in
realized appreciation ...................................... (101,899)
-----------
159,384
-----------
Net increase in net assets
resulting from operations .................................. $ 438,977
===========
Increase in net assets per
share - primary ............................................ $ .12
===========
Increase in net assets per
share - fully diluted ...................................... $ .11
===========
Weighted average number of common shares ...................... 3,560,115
===========
The accompanying notes are a part of this statement.
F-6
<PAGE>
EQUITEX, INC.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31,
1999 1998
(PRO FORMA)*
<S> <C> <C>
Cash flows (used) provided by operating activities:
Net income (loss) ............................ $ (475,344) $ 88,125
Adjustments to reconcile net income
(Loss) to net cash provided by
operating activities:
Depreciation ............................ 17,644 2,721
Services for stock ...................... 150,000
Minority interest in net loss ........... (11,787) 15,115
Changes in assets and liabilities:
Trade receivables ....................... (62,053)
Accounts receivable - other ............. (27,500)
Accounts receivable - brokers ........... 73,741
Advances in FirstNet Capital ............ (567,629)
Loans receivable ........................ (175,000)
Inventories ............................. (22,974)
Prepaid expense and other ............... (13,694) (5,100)
Investments - trading securities ........ 87,839 (276,143)
Investments available for sale securities (35,851) (86,024)
Bank overdraft .......................... (12,666)
Accounts payable and other accrued
liabilities .......................... (30,294) 89,018
Accounts payable to brokers ............. (373,899) 287,555
Deferred income taxes ................... 84,857
Accrued bonus to officer ................ 121,937 (111,456)
----------- -----------
Net cash (used) provided by operating
activities ........................... (1,369,218) 100,357
Cash flows (used) provided by investing activities:
Purchase of fixed assets ..................... (1,662) (2,901)
Repayment of note receivable ................. 16,083
Increase in deferred acquisition costs ....... (41,000)
Increase in deposits and other ............... (46,619)
Increase in tradename and franchise costs .... (27,500)
Investment in First TeleBanc ................. (175,000)
----------- -----------
Net cash (used) provided by
investing activities .............. (291,781) 13,182
</TABLE>
(Continued)
The accompanying notes are a part of this consolidated statement.
* As if an operating company rather than a BDC.
F-7
<PAGE>
EQUITEX, INC.
Consolidated Statement of Cash Flows (Page 2)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31,
1999 1998
(PRO FORMA)*
<S> <C> <C>
Cash flows (used) provided by financing activities:
Common stock issued for cash ................. $ 1,214,650 $ 247,500
Minority interest increase ................... 62,000
Preferred stock issued for cash .............. 2,100,000
Offering costs incurred ...................... (150,000)
Issuance of notes payable - related parties .. 18,199
Repayment of notes payable ................... (1,431) (327,599)
----------- -----------
Net cash (used) provided by financing activities 3,181,418 (18,099)
Change in cash and cash equivalents ................ 1,520,419 95,440
Cash and cash equivalents,
beginning of period .......................... -- 9,187
----------- -----------
Cash and cash equivalents,
end of period ................................ $ 1,520,419 $ 104,627
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid ........................... $ 21,829 $ 21,249
=========== ===========
Interest received ....................... $ 11,390 $ 4,456
=========== ===========
</TABLE>
Supplemental disclosure of non-cash activities:
In March 1999, a noteholder converted his note payable of $150,000 into
the Company's common stock.
In the first quarter of 1999, $200,000 of the Company's common stock was
issued to the placement agent for services rendered relative to the
preferred stock sale.
The accompanying notes are a part of this consolidated statement.
* As if an operating company rather than a BDC.
F-8
<PAGE>
EQUITEX, INC.
Statement of Cash Flows
(Unaudited)
FOR THE THREE
MONTHS
ENDED MARCH 31,
1998
(WHILE A BDC)
Cash flows from operating activities:
Net change in net assets .................................... $ 438,977
Adjustments to reconcile net change in
net assets to net cash provided by
operating activities:
Depreciation and amortization ......................... 2,721
Donation of stock
Provision for bad debts on notes
receivable .......................................... --
Realized (gain) loss on sale of
investments ......................................... (492,474)
Unrealized (gain) loss on investments ................. (261,283)
Proceeds from sales of investments .......................... 712,143
Purchase of investments ..................................... (725,328)
Repayment of notes receivable ............................... 16,083
Issuance of notes receivable ................................ (18,266)
Changes in assets and liabilities:
(Increase) decrease in interest receivable .............. (5,835)
(Increase) decrease in other assets ..................... (5,100)
(Increase) decrease in trade receivables ................ (62,053)
(Increase) decrease in accounts
receivable - brokers .................................. 73,741
Increase in accounts payable and
other accrued liabilities ............................. 104,436
Increase in accounts payable to brokers ................. 287,555
Increase (decrease) in accrued bonus
to officer ............................................ (111,456)
Increase (decrease) in deferred income taxes ............ 191,350
-----------
Net cash (used) by operating
activities ............................................ 145,211
Cash flows from investing activities:
Purchase of furniture and equipment ......................... (2,901)
-----------
Net cash (used) by investing activities ................. (2,901)
(Continued)
The accompanying notes are a part of this statement.
F-9
<PAGE>
EQUITEX, INC.
Statement of Cash Flows (Page 2)
(Unaudited)
FOR THE THREE
MONTHS
ENDED MARCH 31,
1998
(WHILE A BDC)
Cash flows from financing activities:
Repayment of notes payable .................................. $ (327,599)
Common stock issued for cash ................................ 247,500
-----------
Net cash provided (used) by
financing activities ................................. (80,099)
Increase (decrease) in cash .................................... 62,211
Cash, beginning of period ...................................... 9,187
-----------
Cash, end of period ............................................ $ 71,398
===========
Supplemental disclosures of cash flow information:
Interest paid ........................................... $ 21,249
===========
Interest received ....................................... $ 4,546
===========
The accompanying notes are a part of this statement.
F-10
<PAGE>
EQUITEX, INC.
Selected Notes to Financial Statements
(Not a Complete Presentation)
March 31, 1999
(Unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies include:
a. DECERTIFICATION AS A BUSINESS DEVELOPMENT COMPANY (BDC)
On January 4, 1999, the Company withdrew its election to be treated as
a BDC subject to the Investment Company Act. As a result of this withdrawal, the
Company is now required to present its financial statements consistent with
those of a normal operating company as opposed to a business development company
(BDC). Because the Company was a BDC for the quarter ended March 31, 1998 the
statement of operations and cash flows for the 1998 quarter still reflect the
BDC format.
b. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for 1999 include the accounts of
Equitex, Inc., its wholly-owned subsidiary, First TeleServices Corporation which
was acquired August 1998, and two majority-owned subsidiaries, VP Sports, Inc.
and Triumph Sports, Inc. which were formed in December 1997 and January 1998,
respectively. All significant intercompany accounts and transactions have been
eliminated. The equity method of accounting is used for the Company's interest
in two 50%-owned joint ventures over which the Company has the ability to
exercise significant influence. These joint ventures were started in late March
1999 and had no operational activity in the first quarter of 1999. The Company
also has other investments that are less than 20%-owned and are accounted for at
either cost or fair market value as described in Note 1d. below.
The March 31, 1999 unaudited pro forma column in the statement of
revenues and statement of cash flows reflects the Company's consolidated
activity for the three months ended March 31, 1999 as if the Company were an
operating company rather than a BDC at that time.
c. INVENTORIES
Inventories consist of retail merchandise inventory and are stated at
the lower of cost or market. Cost is determined on the average cost method.
d. INVESTMENTS UNDER 20%-OWNED
Investments in marketable securities are stated at fair market value as
determined by the most recently traded price of each security at the balance
sheet date. All marketable securities are defined as trading securities or
available-for-sale securities under the provisions of Statement of Financial
Accounting Standards No. ("SFAS") 115, "Accounting for Certain Investments in
Debt and Equity Securities."
Management will determine the appropriate classification of its
investments in marketable securities at the time of purchase and will reevaluate
such determination at each balance sheet date. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and unrealized holding gains and losses are included in
F-11
<PAGE>
EQUITEX, INC.
Selected Notes to Financial Statements
(Not a Complete Presentation)
March 31, 1999
(Unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. INVESTMENTS UNDER 20%-OWNED (CONTINUED)
earnings. Debt securities for which the Company does not have the intent or
ability to hold to maturity and equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. The cost of investments sold is determined on
the specific identification or the first-in, first-out method. If an investment
does not have a readily determinable fair market value, then it is carried at
cost.
e. INTANGIBLE ASSETS
Intangibles include covenants-not-to-compete, lease assignments, trade
name and franchise rights and the excess of costs over fair value of net assets
of business (four retail stores) acquired. All intangibles are amortized by the
straight-line method over estimated useful lives as follows:
LIFE
Tradename and franchise rights 10 years
Lease assignment 10 years
Non-compete agreement 10 years
Goodwill 10-15 years
The Company periodically assesses whether its goodwill and other
intangible assets are impaired as required by SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
based on an evaluation of undiscounted projected cash flows through the
remaining amortization period. If an impairment exists, the amount of such
impairment is calculated based on the estimated fair value of the assets. In
management's opinion, no material impairment exists at March 31, 1999.
NOTE 2. NOTES PAYABLE
As discussed in Note 3b. below, a noteholder exchanged his $150,000
note and accrued interest for the Company's common stock.
NOTE 3. STOCKHOLDERS' EQUITY
a. PREFERRED STOCK
During the quarter ended March 31, 1999, the Company issued a total of
2,100 shares of 6% Series A, B, and C Convertible Preferred Stock in
consideration for $1,000 cash per share which is the stated value per share.
Each series of stock is convertible into common stock at any time by the holders
at a conversion price equal to 65% of the average closing bid price of the
Company's common stock as specified in the agreement. The holders are entitled
to receive a cumulative annual dividend of $60 per share, which is payable
quarterly and has preference to any other dividends which might be paid by the
Company. The dividend is payable either in cash or in shares of the Company's
common stock, at the Company's option. The Company is required to convert these
shares at the three-year anniversary date. See Note 5 regarding subsequent
conversion of these shares. The preferred stockholders received warrants to
purchase a total of 250,000 whares of the Company's common stock at 120% of the
market price as of the grant date. In addition, the placement agent was issued
20,000 shares of the Company's common stock, valued at $200,000 in exchange for
services in connection with the preferred stock sales.
b. COMMON STOCK ISSUANCES
During the first quarter of 1999, the Company sold 315,312 shares of
its common stock in a private placement for cash of $3.25 per share. In
addition, during the quarter a note holder exchanged his note and accrued
interest for 48,688 shares of the Company's common stock.
During the first quarter of 1999, employees and officers exercised
previously granted stock options for 59,600 shares of common stock.
F-12
<PAGE>
EQUITEX, INC.
Selected Notes to Financial Statements
(Not a Complete Presentation)
March 31, 1999
(Unaudited)
NOTE 3. STOCKHOLDERS' EQUITY (CONTINUED)
c. STOCK OPTIONS AND WARRANTS
In January 1999, the Company's Board of Directors adopted an incentive
stock option plan covering up to 1,000,000 shares of the Company's common stock.
During the quarter ended March 31, 1999, the Company granted incentive stock
options for 29,000 shares and 8,000 shares to the Company's officers and
employees, respectively. In addition, non-statutory stock options for 472,000
and 291,000 shares were granted to officers and directors, respectively. All
options were granted at a price of $6.75 per share which represents fair market
value at the grant date.
A warrant to purchase 50,000 shares of the Company's common stock at
$3.75 per share was granted to an unrelated entity for services rendered, valued
at $150,000. In addition, a warrant to purchase 62,500 whares at an exercise
price of 7.25 per share was granted to another unrelated party.
NOTE 4. COMMITMENTS
As of March 31, 1999 additional rental commitments for office space and
equipment relative to the Company's consolidated subsidiaries are as follows:
Year Amount
1999 $57,558
2000 76,742
2001 74,943
2002 73,658
2003 50,887
Thereafter 103,704
--------
Total $437,492
NOTE 5. SUBSEQUENT EVENTS
a. CONVERSION OF PREFERRED SHARES
In April 1999 all 2,100 shares of the Company's 6% Series A, B and C
Convertible Preferred Stock, plus accrued dividends on those shares, were
converted into approximately 320,528 shares of common stock at an average
conversion price of $6.63 per share.
b. ISSUANCE OF SERIES D PREFERRED
In May 1999 the Company issued 3,500 shares of Series D convertible
preferred stock at $1,000 per share. The Series D preferred stock contains the
same rights as the Series A, B and C Preferred stock discussed in Note 3a.
c. ADDITIONAL COMON STOCK ISSUANCES
Subsequent to March 31, 1999, 591,000 shares of the Company's common
stock were issued pursuant to stock option exercises, 15,000 shares were issued
as part of the private placement, and 260,000 shares were issued pursuant to
warrant exercises.
F-13
<PAGE>
d. PROPOSED BUSINESS ACQUISITION
In May 1999 the Company entered into a letter of intent with a
previously unrelated mortgage lender. Under the terms of the letter of intent,
the Company is to acquire the mortgage company in exchange for shares of the
Company's common stock and a working capital contribution. In May 1999 $2.5
million in working capital funds were loaned to this entity pursuant to the
letter of intent. The mortgage company's common stock secures $2,000,000 of
these advances and the $500,000 remainder is unsecured.
F-14
<PAGE>
Part 1. FINANCIAL INFORMATION
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE REGISTRANT'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED
TO, STATEMENTS CONCERNING THE REGISTRANT'S OPERATIONS, ECONOMIC PERFORMANCE,
FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE",
"MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN
OF WHICH ARE BEYOND THE REGISTRANT'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO THE REGISTRANT'S OPERATIONS, MERGERS OR ACQUISITIONS, GOVERNMENTAL
REGULATION, THE VALUE OF THE REGISTRANT'S ASSETS AND ANY OTHER FACTORS DISCUSSED
IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
OVERVIEW
On January 4, 1999, Equitex, Inc. ("Equitex", the "Company", or the
"Registrant") filed with the Securities and Exchange Commission to withdraw its
election to be treated as a business development company ("BDC") and elected to
be treated for a maximum period of one year as a "transient investment company"
as that term is defined in the Investment Company Act of 1940 (the "Investment
Company Act"). A BDC is a form of closed-end, non-diversified investment company
under the Investment Company Act. Following the withdrawal, the Registrant is no
longer subject to the regulatory provisions of the Investment Company Act for
BDC's, such as insurance, custody, composition of the board, affiliated
transactions and compensation arrangements. Despite the Company's withdrawal of
its election as a BDC, the Company continues to be subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Under the Exchange Act, the Registrant continues to file periodic reports
on Form 10-KSB and Form 10-QSB, as well as reports on Form 8-K and proxy
statements and any other reports required under the Exchange Act. As a result of
the Company's withdrawal of its election to be treated as a BDC, the Company is
now operating as a holding company which must consolidate its financial
statements with those of its majority-owned subsidiaries.
On August 13, 1998, the Registrant acquired all of the outstanding stock of
First TeleServices Corp. ("FTC") in exchange for 625,000 shares of the
Registrant's common stock. As a result of this transaction, FTC became a wholly
owned subsidiary of the Company. FTC is a fee-based financial services
organization consisting of a database marketing division, consumer finance
division, an inbound/outbound calling center, and an operations center. FTC has
developed strategic alliances with a number of nationwide organizations to
outsource certain of its operations as well as the products and services it
offers.
F-15
<PAGE>
FTC has only partially begun operations and has not yet generated income. As a
marketing arm for financial institutions, FTC will perform as a consumer finance
company, offering a broad array of financial products and services to the
sub-prime market. These products will be developed through correspondent
relationships with companies specializing in those particular products which may
include: debt transfer servicing; balance transfer servicing; secured credit
cards; sub-prime mortgage loans; sub-prime auto loans; prepaid calling cards;
prepaid residential long distance service; prepaid cellular service; insurance
products; and other selected products and services.
During the first quarter, FTC entered into a joint venture agreement with RLG
Holdings, LLC ("RLG") to service, collect and sell portfolios of consumer debt.
RLG is a Florida based financial services company specializing in acquisition,
value enhancement and profitable disposition of consumer collection portfolios
and performing and non-performing real estate secured notes receivable
portfolios. Utilizing funds provided by FTC and RLG, the joint venture company,
FirstNet Capital, acquired two debt portfolios, the first of which consists of
over 13,000 accounts representing in excess of $100 million. The second and most
recent acquisition consists of 15,600 charged-off credit accounts in Canada with
an aggregate balance of approximately $34 million Canadian. The Company, through
FTC, advanced a total of $568,000 to the joint venture during the quarter ended
March 31, 1999.
Also during the quarter ended March 31, 1999, the Company, through FTC, loaned
$175,000 to National Business Finance, LLC ("NBF"). NBF is a SBA (Small Business
Administration) loan originator which originates and sells to SBA lenders,
including Net1Bank, SBA loans for a fee. An additional $125,000 was loaned to
NBF following quarter end and prior to the filing of this report.
In the fourth quarter of 1998, the Registrant acquired a number of shares of
First TeleBanc Corp. ("FTB") which now totals 7.5% of FTB's outstanding capital
stock. On April 12, 1998 the Registrant announced its intent to merge with FTB
and has since executed a definitive agreement for the merger which calls for the
Company to acquire all of the outstanding capital stock of FTB in an exchange of
stock. Under the terms of the agreement, the existing stockholders of FTB will
receive shares of Equitex common stock based on certain factors, principally the
relative value of each company. In addition, certain of the non-financial
services related assets of Equitex will be spun off to the Company's
stockholders through a newly formed publicly traded company which will be
managed by the Company's current management and board of directors. Equitex is
in the process of filing for regulatory approval of the transaction with the
Federal Reserve Bank of Atlanta. A meeting of Equitex stockholders to vote on
the merger will be scheduled as soon as possible.
FTB is the bank holding company for Net1Bank, N.A., formerly known as Boca Raton
First National Bank, a 13 year-old nationally chartered bank based in Boca
Raton, Florida. FTB intends to operate as a single bank holding company through
Net1Bank offering both traditional walk-in banking services as well as Internet
banking. Net1Bank will also focus on fee-based programs such as SBA lending,
secured credit cards and electronic transaction processing. Concurrent with the
closing of the merger, if consummated, the newly merged company will change its
name to Net1Bank Corp. and FTB's existing board of directors will become the
board of the new bank holding company.
F-16
<PAGE>
On May 13, 1999, the Company announced the signing of a letter of intent with
First Bankers Mortgage Services, Inc. ("FBMS") of Ft. Lauderdale, Florida. The
letter of intent calls for the acquisition by the Registrant of all of the
outstanding capital stock of FBMS for a combination of Equitex common stock and
a commitment of working capital to the ongoing entity. Following the execution
of the letter of intent, the Registrant made loans totaling $2.5 million to
FBMS, $2 million of which is secured by all of the issued and outstanding common
stock of FBMS. As of the filing of this report, the companies are performing
customary due diligence and negotiating the terms of a definitive agreement.
FBMS is one of the 70 largest mortgage lenders in the United States operating in
25 states and is the largest privately held mortgage lender in the state of
Florida. FBMS profitably originated in excess of $850 million in mortgage loans
during 1998.
In June 1998, the Registrant commenced a private placement of up to 300,000
shares of the Registrant's common stock at $3.25 per share to accredited
investors. In October 1998, the board of directors of the Registrant increased
the number of shares which could be sold pursuant to the offering from 300,000
to 750,000 shares. During the quarter ended March 31, 1999, the Registrant
completed this offering with the sale of 364,000 shares of common stock for
total proceeds of $1,183,000, $158,236 of which was converted debt.
During the first quarter of 1999, the Registrant completed three offerings
through which a total of 2,100 shares of the Company's $.01 par value preferred
stock were sold to accredited investors for $1,000 per share. The Company sold
900 shares of its Series A 6% Convertible Preferred Stock for total proceeds of
$900,000, less offering expenses. The Series A 6% Convertible Preferred Stock
carries a 6% interest rate paid quarterly in either cash or stock and may be
convertible into shares of the Company's common stock at 65% of the five day
average bid price of the Company's common stock for the five days immediately
preceding conversion. The Company sold 600 shares of its Series B 6% Convertible
Preferred Stock for proceeds of $600,000 and 600 shares of its Series C 6%
Convertible Preferred Stock for proceeds of $600,000. The Series B and C
Preferred Stock carries the same terms and conditions as those of Series A.
During the month of April 1999, all of the outstanding shares of the Series A, B
and C preferred stock, including dividends payable, were converted into a total
of 320,528 shares of Equitex common stock.
During the month of May 1999, the Company sold 3,500 shares of its Series D 6%
Convertible Preferred Stock to an accredited investor under terms and conditions
similar to those of the Series A, B and C Preferred Stock. The total proceeds of
$3,500,000, less offering costs, are currently being held in escrow pending
authorization by the Company's stockholders of a sufficient number of shares of
the Company's common stock to cover those shares underlying the Series D
preferred stock. The Company has filed a preliminary proxy statement with the
Securities and Exchange Commission for a Special Meeting of Stockholders to be
held during the Summer of 1999 at which the Company's stockholders will be asked
to vote on a proposal to increase the number of authorized shares of the
Company's common stock from 7,500,000 to 50,000,000.
F-17
<PAGE>
A majority of the proceeds of these offerings have been and will be used in
connection with the Registrant's merger and acquisition activities as well as
for working capital. During the quarter ended March 31, 1999, the Company loaned
a total of $935,129 to its wholly owned subsidiary, FTC, which was used in
connection with FTC's investment activities as outlined above as well as for
working capital and operating overhead. Portions of the proceeds as well as cash
received from the exercise of outstanding stock options were also used in the
loans made to FBMS as explained above.
As part of the Company's transition from a BDC to an operating company, the
operations of two of the Company's BDC investments, Triumph Sports, Inc.
("Triumph") and VP Sports, Inc. ("VP"), both of which are majority owned by the
Registrant, must be consolidated with those of the Registrant and that of its
wholly owned subsidiary FTC. In the latter part of 1998, Triumph acquired and
currently operates four health food, nutritional and supplement related retail
outlets in south Florida. Triumph is an authorized franchisee of General
Nutrition Centers ("GNC") which stores comprise one of those operated. In
addition, Truimph has signed an agreement with GNC to open an additional unit in
the south Florida area. The Company owns approximately 79% of Triumph. VP has
executed a letter of intent for the acquisition of a Canada based manufacturing
company and is currently finalizing a definitive agreement. VP has received a
non-binding financing commitment from an asset-based lender which is performing
its due diligence review. Equitex owns approximately 87% of VP.
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and notes thereto. As a result of the Company's change from
a BDC to an operating company effective January 4, 1999, the Company is now
required to present its financial statements consistent with those of an
operating company as opposed to an investment company. Accordingly, the March
31, 1998 statements of operations and cash flows are presented in both a
pro-forma format which assumes the Company was an operating company instead of a
BDC as well as the investment company format which includes the actual results
for the Company's operations as a BDC in that period.
REVENUES: Revenues for the quarter ended March 31, 1999 were $582,609 as
compared to pro-forma revenues of $493,780 at March 31, 1998 and actual revenues
of $261,321 for the Company's BDC operations for the same period. Of these
revenues, $360,261 are attributed directly to the operations of the Registrant
while $222,348 are attributed to its consolidated subsidiaries, all of which
came from the operations of Triumph. Neither FTC nor VP generated revenues
during the quarter. Of these revenues, $222,348 were sales generated by
Triumph's retail stores while $315,564 were realized gains on the Registrant's
investments most of which was received from the sale of certain of the Company's
shares of IntraNet Solutions.
EXPENSES: The Registrant's expenses increased significantly during the first
quarter of 1999 to $1,069,740 as compared to a pro-forma $369,462 and actual
expenses of $384,751 for the same period in 1998. A majority of this increase is
a direct result of the consolidation of three new entities with that of the
Registrant. The addition of cost of goods sold of $131,086 for Triumph as well
as salaries, rent, advertising and promotion, depreciation, general and
administrative and other costs associated with the operating overhead of the
Company's subsidiaries combine to form a significant portion of this increase.
F-18
<PAGE>
In addition, officer's bonus increased from $43,545 in the prior period to
$222,561 for the current period as a result of a change in the nature in which
the officer's bonus is paid from a percentage of total assets to primarily the
increase in the market value of the Registrant's common stock. Of the Company's
total expenses, approximately $274,349 are attributed to Triumph and $83,918 are
attributed to FTC. VP had only minimal expenses for the quarter.
MINORITY INTEREST: For the quarter ended March 31, 1999, the Registrant had
minority interest in net loss of $11,787 as compared to $15,115 for the same
period in the previous year.
OTHER INCOME: The Registrant recorded $35,851 in other comprehensive income, net
of tax for the quarter ended March 31, 1999 as compared to $52,475 for the same
period in 1998. This represents non-cash income for unrealized gains on certain
of the Company's securities investments that have been classified as "available
for sale securities".
NET LOSS: For the quarter ended March 31, 1999, the Registrant recorded a net
loss of $475,344 or $.07 per share as compared to pro-forma net income of
$88,125 or $.04 per share for the quarter ended March 31, 1998. As a BDC, the
Company recorded net investment loss and net realized gain on investments of
$279,593 and a net increase in net assets resulting from operations of $438,977
for the first quarter of 1998.
Several factors accounted for the net loss in the current year as opposed to net
income for the same period in 1998 on a pro-forma basis including consolidation
of the Company's subsidiaries. Of the net loss, Triumph accounted for
approximately $26,000 while FTC accounted for about $84,000. In addition, a
one-time non-cash consulting fee paid with the Registrant's common stock
totaling $150,000 in expenses was recorded during the quarter which contributed
to the loss as well as the $222,561 bonus to officer which was accrued but not
paid during the quarter.
LIQUIDITY AND CAPITAL RESOURCES: The Registrant's sources of liquidity and
capital resources are primarily derived from several sources including sales of
investments and proceeds from sales of the Registrant's common and preferred
stock. As a result of the cash receipts outlined below, the Registrant presently
anticipates its liquidity and capital resources are sufficient to fund the
Company's current and planned operations for the foreseeable future. However, as
more fully explained in "Overview" above, the Company has signed agreements,
which, if consummated, would result in a fundamental change in the nature of the
Company's business. While terms of those agreements call for significant cash
balances to remain with the Registrant following the proposed transactions, no
assurance can be made that the Company's present liquidity and capital resources
will be sufficient to fund the future operations of the Registrant should the
contemplated mergers and acquisitions take place. Further sales of the
Registrant's securities or other sources of income may be necessary to
adequately fund those operations.
During the first quarter of 1999, the Registrant received a total of $2,100,000
before expenses from the sale of preferred stock and $1,183,000 from the sale of
common stock in a private placement. As a result of the aforementioned sales of
the Company's securities along with the proceeds from sales of certain of the
Company's investments which totaled in excess of $400,000, the Registrant had a
cash position at March 31, 1999 of $1,520,419 all but a very small portion of
which was held directly by the Registrant, not its subsidiaries.
Subsequent to March 31, 1999, additional cash was received through the exercise
of certain options and warrants which generated approximately $2,500,000. In
addition, the Company has sold 3,500 shares of its Series D 6% Convertible
Preferred stock for total proceeds of $3,500,000 which currently are being held
in escrow.
F-19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On January 4, 1999 the Registrant issued 900 shares of its Series
A Convertible Preferred Stock for cash consideration of $900,000
to an accredited investor. The Preferred Stock is convertible
into common stock at 65% of the average closing bid price of the
Registrant's common stock as reported by the Nasdaq Stock Market
for the five days immediately preceding conversion, including
interest due and payable. The Registrant relied on the exemptions
from registration provided by Sections 4(2) and/or 4(6).
On January 12, 1999 the Registrant issued 600 shares of its
Series B Convertible Preferred Stock for cash consideration of
$600,000 to a group of accredited investors. The Preferred Stock
is convertible into common stock at 65% of the average closing
bid price of the Registrant's common stock as reported by the
Nasdaq Stock Market for the five days immediately preceding
conversion, including interest due and payable. The Registrant
relied on the exemptions from registration provided by Sections
4(2) and/or 4(6).
On January 20, 1999 the Registrant issued 20,000 shares of its
common stock to the Placement Agent for its Series A, B and C
Convertible Preferred Stock in exchange for services rendered.
The Registrant relied on the exemptions from registration
provided by Sections 4(2) and/or 4(6).
On January 29, 1999 the Registrant issued 600 shares of its
Series C Convertible Preferred Stock for cash consideration of
$600,000 to an accredited investor. The Preferred Stock is
convertible into common stock at 65% of the average closing bid
price of the Registrant's common stock as reported by the Nasdaq
Stock Market for the five days immediately preceding conversion,
including interest due and payable. The Registrant relied on the
exemptions from registration provided by Sections 4(2) and/or
4(6).
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K
(a) Financial data schedule for SEC registrants
(b) The Company filed no reports on Form 8-K during the
quarter covered by this report
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUITEX, INC.
(Registrant)
By /S/ HENRY FONG
-----------------------------------
Henry Fong
President, Treasurer and Chief
Financial Officer
Date: July 14, 1999
F-21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Registrant's Quarterly Report on Form
10-QSB/A for the quarter ended March 31, 1999, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,520,419
<SECURITIES> 1,415,702
<RECEIVABLES> 816,129
<ALLOWANCES> 100
<INVENTORY> 142,672
<CURRENT-ASSETS> 106,673
<PP&E> 292,707
<DEPRECIATION> 145,256
<TOTAL-ASSETS> 6,220,632
<CURRENT-LIABILITIES> 1,527,094
<BONDS> 0
0
21
<COMMON> 117,225
<OTHER-SE> 35,851
<TOTAL-LIABILITY-AND-EQUITY> 6,220,632
<SALES> 222,348
<TOTAL-REVENUES> 582,609
<CGS> 131,086
<TOTAL-COSTS> 131,086
<OTHER-EXPENSES> 904,120
<LOSS-PROVISION> 13,748
<INTEREST-EXPENSE> 20,786
<INCOME-PRETAX> (475,344)
<INCOME-TAX> 0
<INCOME-CONTINUING> (475,344)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (475,344)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
